American Contract Law in a Comparative Perspective

1
American Contract Law in a Comparative
Perspective

• Professor Nathan M. Crystal
• University of South Carolina
• School of Law

2
Overview

• 10 lectures examining fundamental concepts in US
  contract law
• Leading US cases
• Current US Law

3
Overview

• Comparison with International and European Law as
  reflected in
• Convention on International Sale of Goods (CISG)
• International Institute for the Unification of
  Private Law (UNIDROIT), Principles of
  International Commercial Contracts (2004)
  (UNIDROIT Principles)
• Principles of European Contract Law (1999-2003),
  prepared by Commission on European Contract Law
  (European Principles)

4
Mi Dispiace

• For my inability to give these lecture in Italian
• Please let me know if I am talking too fast by
  raising your hand.
• I welcome questions at any time during the
  lectures.
• I will post these power points on a website so
  that you can review them.

5
Bases of Contractual Obligation and Sources of
Law

• I Objective Theory of Contract and II. the
  Doctrine of Consideration

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I. Objective Theory of Contract
7
Leading case

• Raffles v. Wichelhaus (England 1864)
• (the Peerless case)

8
Facts

• Contract for sale of 125 bales of cotton
• Shipment from Bombay to Liverpool via ship
  Peerless
• Two ships Peerless
• Seller had in mind delivery on December Peerless
• Buyer had in mind delivery on October Peerless
• Buyer rejected and seller sued

9
Decision

• Court found no contract because no consensus ad
  idem
• no agreement on same thing

10
Subjective theory of contract

• Raffles usually cited as example of subjective
  theory of contract
• Existence of contract requires actual agreement
  of parties
• Must have meeting of the minds

11
Some consequences of subjective theory

• Contract making less secure
• Question of fact whether party intended to be
  bound
• Possibility of strategic behavior when contract
  turns out to be undesirable
• Do you think the price of cotton rose or fell
  between October and December?

12
Shift to objective theory of contract

• First third of 20th century, shift in US to
  objective theory of contract

13
Judge Learned Hand

• A contract has, strictly speaking, nothing to do
  with the personal, or individual, intent of the
  parties. A contract is an obligation attached by
  the mere force of law to certain acts of the
  parties, usually words, which ordinarily
  accompany and represent a known intent. gt

14
Hand quote continued

• If, however, it were proved by twenty bishops
  that either party, when he used the words,
  intended something else than the usual meaning
  which the law imposes upon them, he would still
  be held, unless there were some mutual mistake,
  or something else of the sort. Hotchkiss v.
  National City Bank, D.C., 200 F. 287, 293.

15
Restatement (First) of Contracts, 230, illus. 1
(1932)

• . . . A promises to sell, and B promises to buy
  certain patents. A intends to sell only English
  patents on a certain invention. B understands
  that A promises to sell the English, French, and
  American patents on the invention. If a
  reasonably intelligent person . . . would
  understand the agreement to state a promise to
  sell the English and American patents, but not
  the French patents, there is a contract and A and
  B are bound by that meaning.

16
Arthur Corbin criticism of objective theory

• Tto hold that, although A intends to sell
  Blackacre and B intends to buy Whiteacre, A must
  convey and B must accept Greenacre because their
  contract would so be understood by C or by a
  large community of third persons, is to hold
  justice up to ridicule. 3 Corbin on Contracts
  539, at 81.

17
Other possible applications of subjective/objectiv
e theory

• One party claims no contract, just a joke
• Agreements to agree when one party says did not
  intend to be bound until formal agreement signed
• Language used in contract has special meaning
  between parties or in the trade

18
Current US Law

• Restatement (Second) of Contracts 201 (1981),
  Whose Meaning Prevails

19
Restatement 201(1)

• Where the parties have attached the same meaning
  to a promise or agreement or term thereof, it is
  interpreted in accordance with that meaning.

20
Restatement 201(2)

• Where the parties have attached different
  meanings to a promise or agreement or a term
  thereof, it is interpreted in accordance with the
  meaning attached by one of them if at the time
  the agreement was made

21
Restatement 201(2)(a), (b)

• (a) that party did not know of any different
  meaning attached by the other, and the other knew
  the meaning attached by the first party or
• (b) that party had no reason to know of any
  different meaning attached by the other, and the
  other had reason to know the meaning attached by
  the first party.

22
Restatement 201(3)

• (3) Except as stated in this Section, neither
  party is bound by the meaning attached by the
  other, even though the result may be a failure of
  mutual assent.

23
Analyzing the Restatement approach

• Has subjective element, 1.
• Has objective element, 2.
• Best characterized as modified, objective
  approach.

24
International and European Contract Law

• Convention on International Sale of Goods (CISG)
  Art. 8

25
CISG Article 8(1)

• For the purposes of this Convention statements
  made by and other conduct of a party are to be
  interpreted according to his intent where the
  other party knew or could not have been unaware
  what that intent was.

26
CISG Article 8(2)

• If the preceding paragraph is not applicable,
  statements made by and other conduct of a party
  are to be interpreted according to the
  understanding that a reasonable person of the
  same kind as the other party would have had in
  the same circumstances.

27
CISG Article 8(3)

• In determining the intent of a party or the
  understanding a reasonable person would have had,
  due consideration is to be given to all relevant
  circumstances of the case including the
  negotiations, any practices which the parties
  have established between themselves, usages and
  any subsequent conduct of the parties .

28
International and European Contract Law

• International Institute for the Unification of
  Private Law (UNIDROIT), Principles of
  International Commercial Contracts (2004)

29
UNIDROIT Principles, Art. 4.1, Intention of the
Parties

• (1) A contract shall be interpreted according to
  the common intention of the parties.
• (2) If such an intention cannot be established,
  the contract shall be interpreted according to
  the meaning that reasonable persons of the same
  kind as the parties would give to it in the same
  circumstances.

30
International and European Contract Law

• Principles of European Contract Law (1999-2003),
  prepared by Commission on European Contract Law

31
European Principles, Art. 2102, Intention

• The intention of a party to be legally bound by
  contract is to be determined from the party's
  statements or conduct as they were reasonably
  understood by the other party.

32
European Principles, Art. 5101, General Rules of
Interpretation

• (1) A contract is to be interpreted according to
  the common intention of the parties even if this
  differs from the literal meaning of the words.

33
European Principles, Art. 5101, General Rules of
Interpretation

• (2) If it is established that one party intended
  the contract to have a particular meaning, and at
  the time of the conclusion of the contract the
  other party could not have been unaware of the
  first party's intention, the contract is to be
  interpreted in the way intended by the first
  party.

34
European Principles, Art. 5101, General Rules of
Interpretation

• (3) If an intention cannot be established
  according to (1) or (2), the contract is to be
  interpreted according to the meaning that
  reasonable persons of the same kind as the
  parties would give to it in the same
  circumstances.

35
II. Doctrine of Consideration
36
Why should promises be enforced?

• Both Civil Law and Anglo-American Law (the
  common law) have long provided legal remedy for
  breach of contract
• But reasons for enforcement continue to be
  debated
• Traditional answer of common law was doctrine of
  consideration promise is legally enforceable if
  supported by consideration

37
Doctrine and Policy Distinguished

• Doctrine legal principle used by courts and
  scholars to resolve legal issue
• Policy reason for acceptance of legal principle
• Consideration is a doctrine, but what is the
  policy?

38
Brief History of Consideration Doctrine

• 13th Century English law recognized two
  predecessors to modern contract
• Writ of covenant sealed instrument
• Writ of debt required specific sum of money owed
• Neither provided full remedy equivalent to modern
  breach of contract
• In particular, debt required specific sum owed
  and not available if promisor had died

39
History of Consideration continued

• During 15th and 16th century, English courts
  gradually recognized new writ that is basis of
  modern contract, the writ of assumpsit
• Assumpsit replaced covenant and debt.

40
History of Consideration continued

• Unlike earlier writs, which had clear limits,
  assumpsit did not.
• Courts gradually developed requirements.
  Plaintiff must plead factors defendant considered
  in making promise. These factors or
  considerations became formal requirements.

41
Leading case

• Hamer v. Sidway (NY 1891)

42
Facts

• Wedding celebration
• William Story, Sr. uncle of William Story, 2d
• Uncle, in presence of guests and family, promised
  that if nephew would refrain from drinking,
  using tobacco, swearing and playing cards or
  billiards for money until he became twenty-one
  years of age he would pay him a sum of 5,000
• Nephew assented and fully performed
• Uncle died and estate refused to pay.

43
Analysis of Hamer

• Estate argued no consideration because nephew
  benefited rather than harmed by refraining from
  various activities.
• Court finds promise enforceable.
• Consideration consists of either a benefit
  received by promisor or detriment suffered by
  promisee because of promise.
• Nephew suffered detriment because refrained from
  doing things that had right or power to do.

44
Modern US Law

• US law still requires consideration to enforce
  standard contract. Restatement (Second) of
  Contracts 17.

45
Restatement (Second) of Contracts 17

• Requirement of a Bargain
• Except as stated in Subsection (2), the formation
  of a contract requires a bargain in which there
  is a manifestation of mutual assent to the
  exchange and a consideration.
• . . .

46
Modern US Law

• Modern law has moved away from benefit/detriment
  test. Consideration consists of any performance
  or promise that is bargained for and given in
  exchange for promise. Restatement 71.

47
Restatement (Second) of Contracts 71

• Requirement of Exchange, Types of Exchanges
• (1) To constitute consideration, a performance
  or a return promise must be bargained for.
• (2) A performance or return promise is bargained
  for if it is sought by the promisor in exchange
  for his promise and is given by the promisee in
  exchange for that promise. . . .

48
International and European Contract Law

• CISG 11
• A contract of sale need not be concluded in or
  evidenced by writing and is not subject to any
  other requirements as to form. It may be proved
  by any means, including witnesses.

49
International and European Contract Law

• UNIDROIT Principles, Article 2.1 (Manner of
  Formation)  
• A contract may be concluded either by the
  acceptance of an offer or by conduct of the
  parties that is sufficient to show agreement.

50
International and European Contract Law

• European Principles, Art. 2101, Conditions
• for the Conclusion of a Contract
• (1) A contract is concluded if
• (a) the parties intend to be legally bound, and
• (b) they reach a sufficient agreement without
  any further requirement.
• (2) A contract need not be concluded or evidenced
  in writing nor is it subject to any other
  requirement as to form. The contract may be
  proved by any means, including witnesses.

51
International and European Contract Law

• European Principles, Art. 2107, Promises Binding
  Without Acceptance
• A promise which is intended to be legally binding
  without acceptance is binding.

52
Analysis of US and International Approaches

• No legal system will enforce all promises. Need
  to be able to distinguish between promises that
  should be enforced and those that should not.
• Consideration doctrine does poorly
• historically based rather than on policy
• under doctrine many serious commercial promises
  not enforceable

53
Analysis of US and International Approaches

• International approach seems better as mater of
  policy.
• If intention to be legally bound, should be
  sufficient.
• If have concern about particular types of
  agreements, e.g. charitable donations or real
  estate, have special rules for these.